Alternative Energy - down, out and forgotten?

It was an entire generation ago on October 17, 1973 that Saudi Arabia and
a number of its oil-producing neighbours shut down oil supplies to America
in response to the Arab/Israeli war known as the Yom Kippur War. Since then
the Middle East has been a cauldron of conflicts (Iranian hostage crisis, Iran/Iraq
war, Gulf Wars 1 and 2 and the never ending Israeli/Palestinian war) and terrorist
activity. Oil, war and terrorism they all seem to be interconnected.

The importance of this conflicted zone is not to be underestimated. World
oil demand, currently sits near 80 million barrels per day, over 29 billion
barrels a year (Estimated global reserves of conventional oil - about 800-1000
billion barrels although anywhere from 3000-8000 billion barrels counting unconventional
sources, which may be expensive to extract, can not be pumped to the surface,
deep ocean, or environmentally sensitive zones etc.).

While Chinese demand is pushing up the numbers it is the USA that consumes
20 million barrels a day or 25% of the worlds total with only 5% of the world's
population. Oil is a strategic commodity and securing the sources is a stated
policy of the US Administration no matter who is in charge. The Mid-East is
estimated to hold upwards of two-thirds of the world's known conventional reserves.
The USA obtains roughly 25% of its imports (or 14% of its total) from the Mid-East
underscoring the area's importance as a swing producer.

It seems that everywhere we turn today oil prices are dominating the headlines
both print and television. Oil prices are hitting the highs seen at the time
of Gulf War 1 in 1990 and the Iranian Hostage crisis in 1979. In real terms
of course it is no where near those levels as oil would have to reach towards
$60 to equal the 1990 highs and $80 to $90 to reach the heights of the late
70's. Record high gasoline prices are also kicking in coupled with dwindling
refinery supplies and recent write downs in reserves by some major oil companies.

Rising oil prices act like a tax on the economy hitting every sector including
transportation (trucking, airlines), tourism (airlines, autos), consumer (autos,
home heating) and business (heating, oil based products). Cries are rampant
of gouging by oil companies and price fixing. Demands are made to do something
about it. North Americans are used to paying the world's lowest price for oil
and gas and anything that prevents them from going anywhere, anytime in their
SUV's is taken personally.

Numerous analysts keep saying that prices should come down because Saudi Arabia
can pump more or that more production will come on stream to compensate for
growing demand. Clearly while oil plays less of a role in the economy then
it did back in the 1970's it still plays an extremely important role and rising
prices slows economic growth, contributes to rising interest rates and inflationary
pressures and is a significant contributor to the recently announced record
monthly trade deficit in the US.

It is moot whether the price temporarily comes down because Saudi Arabia might
pump more or oil or others come forward to take up some slack. The ability
for oil producers to pump more oil is limited and much of the oil that can
be added comes from the sensitive Mid-East, an area wracked in war, terrorism
and uncertainty. That US troops currently sit in Iraq only a short hop away
from Saudi Arabia is also moot as ongoing rebellions in Iraq demonstrate that
it doesn't take a whole lot to disrupt supplies, pipelines and oil infrastructure.

In our article on "Energy Wars" (April 16, 2004) we noted from Paul Michael
Wihbey, President of GWEST and writing for First Energy Capital that instability
in Iraq, Venezuela and Saudi Arabia are key areas of political instability
that are going to continue to drive up the prices of conventional oil. And
considerable higher prices are required to tap fully into the huge potential
unconventional reserves in the Canadian Oil Sands and the Venezuelan Shale
Fields and other places.

So what happened to alternative energy led by hydrogen fuel cells in all this
chaos and price increases? It seems to have fallen off the radar screen. Well
it is still there with numerous companies including the major automobile companies,
oil companies, power companies, other giants such as General Electric and numerous
small independent companies building and even selling alternative energy solutions.
Fuel cells are being used but so far use is limited although one sits right
in Times Square New York in a shiny new building called the Conde Nest. Fuel
cells are being applied not only to automobiles but cell phones, batteries,
laptops and host of other products.

Hydrogen fuel cells are actually becoming a viable alternative although few
seem to expect that it might ever make up more than 5% or so of demand. Other
sources of alternative energy are also on the verge of becoming available including
Bioethanol a combination of oil and ethanol although the major problem here
is cost. And cost is the major problem for all this as well as acceptance and
prices high enough for oil and gas that it makes it viable to do the massive
conversions that are required to change to an alternative source of fuel.

Trouble is every time oil prices rise sharply like they are right now the
hue and cry starts to do something to bring down costs. And therein lies much
of the problem. The consumer complains and big oil companies (and automobile
companies) are not only big and monolith, they are powerful with a huge lobby.
The current US administration is made up of people largely from the oil industry.
So anything that might threaten big oil to become the next horse and buggy
maker, efforts are channelled to securing oil supplies and finding ways to
increase supply rather than alternatives.

There are subsidies to oil and conversely a lack of significant subsidies
to alternative energy. There are insufficient efforts towards decreasing demand
through additional taxes and bringing North American prices in line with the
rest of the world (which would require at least a doubling even from these
lofty levels). And of course one of the biggest benefits to shifting to alternative
energy is a cleaner environment.

In looking at numerous alternative energy stocks it really does look like
they are down, out and forgotten. Even as things look up for some like Ballard
Power Systems Inc. (BLD-TSX) (www.ballard.com,
604 412-7929) they announce poor results and the stock takes a big tumble (possible
double bottom?). Indeed it seems only a few weeks ago that some of them were
looking up and then they suddenly look well& You read the title. But maybe
all the uncertainty is positive as some of them are beginning to form decent
bases.

Some possible picks are FuelCell Energy Inc. (FCEL-NASDAQ) (www.fce.com,
(203) 825-6000) a developer of electrochemical and fuel cell technologies for
power generation plants; Plug Power (PLUG-NASDAQ) (www.plugpower.com,
(518) 782-7700) a developer of electrical generation systems and fuel cells
for residential applications; Palcan Fuel Cells Ltd. (PC-TSXV) (www.palcan.com,
604 422-8868) a developer and manufacturer of 100 watt to 5 kilowatt PEM fuel
cells and metal hydride hydrogen storage products for smaller vehicles; and
Fuel Cell Technologies Corp. (FCT-TSXV) (www.fct.ca,
613 544-8222) a developer of small scale power systems for applications in
residential, small business and remote sites. The latter two are clearly highly
speculative and the former pair are higher risk.

David Chapman is a director of Bullion Management Services
the manager of the Millennium BullionFund www.bmsinc.ca

Note: The opinions, estimates and projections stated
are those of David Chapman as of the date hereof and are subject to change
without notice. David Chapman, as a registered representative of Union Securities
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